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Modelling illustrative electricity sector policies

The Authority commissioned two types of economic modelling to inform its consideration of policy options for Australia’s electricity supply sector as part of the Special Review. The first compared a wide range of policies for the electricity sector using a model of the electricity sector only. The second modelled the economy-wide implications of a subset of the policies.

The modelling of policies for the electricity supply sector provides a quantitative comparison of policy options on a like‑for‑like basis. It is important to note that the modelling does not aim to predict future outcomes; rather it is intended to provide high‑level insights to inform policy choice.

The Authority engaged:

Jacobs Group to undertake electricity market modelling of a wide range of mitigation policy options and

Victoria University to undertake computable general equilibrium (CGE) modelling on a subset of electricity sector mitigation policies to assess their economy wide impacts on direct and indirect costs.

Appendix C of the Authority’s electricity research report provides an overview of the commissioned modelling.PDF

Electricity sector modelling

Jacobs’ modelling compares the performance of a range of policies on the electricity supply sector, using a model of the electricity sector only. In order to facilitate a like‑for‑like comparison of policies, the modelling used common input assumptions and constrained each policy scenario to achieve the same emissions budget over 2020 to 2050.

The modelling work had two broad phases. Phase one compared seven policies, broadly representative of those proposed and discussed in Australia in recent years. In phase two, the Authority selected a sub-set of policy scenarios for further investigation, including sensitivity analysis and robustness tests.

The economy wide modelling compared the relative performance of two market mechanisms and assessed their impact on both direct and indirect costs. Direct costs are the additional costs above those that would have occurred in the absence of the policy, such as the added cost of investing in a low‑emissions electricity generation plant rather than a high‑emissions one. In addition to their direct costs, policies often involve indirect costs, including those due to interactions with the tax system. Taxes and price rises generally dampen economic activity. These indirect costs are more important to the cost effectiveness of policies than has been generally recognised. The modelling suggests that the performance of different policies with respect to indirect costs depends in part on how revenue is recycled.

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Victoria University modelling report: Simulations of the effects of greenhouse gas mitigation policies for the Australian electricity sectorPdf 2 Mb

To test the robustness of the policy comparisons in Jacobs’ modelling, the Authority commissioned HoustonKemp to undertake an independent peer review.

HoustonKemp found that the modelling had been conducted to a high standard of rigour and that the critical policy comparisons drawn by Jacobs were robust.

HoustonKemp suggested several minor areas for improving the modelling exercise. Where feasible, Jacobs updated the modelling results and modelling report; these changes are outlined in Jacobs’ response to the peer review.